Impact of Trade Openness on Inflation in India : An Autoregressive Distributed Lag (ARDL) Approach

The paper aims to examine the dynamic impact of openness on inflation in India applying by an Autoregressive Distributed Lag (ARDL) Bound testing approach. Empirical evidence shows that there is a unique and stable long-run relationship between inflation and other variables, such as trade openness, import openness, exchange rate depreciation, real gross domestic product, and money supply. Results based on bound test approach confirm the existence of a long-run relationship among the variables. Cumulative sum test (CUSUM and CUSUMSQ) validates long-run the relationship between variables and shows the stability of coefficients in the model. Overall, a positive relationship is observed between openness and inflation both in long- and short-run and hence, it disproves the Romer's Hypothesis (1993) of an inverse relationship between openness and inflation. Additionally, results show a positive correlation between inflation and other variables